What’s Wrong with Net Pharmacies?

In July of 1999, online pharmacy Drugstore.com (Nasdaq: DSCM) went public with an IPO price of $18 (US$). The stock rose to 67 1/2 before beginning a long decline that would take it to a low of 4 11/16. Shares are now hovering around 6, and Drugstore.com is among the high profile e-commerce firms languishing on the second tier of Goldman Sachs’ notorious June “death watch” list.

But wait — the company also claimed the top spot in the health category of the latest “PowerRankings” from Forrester, which the research firm says “combine survey data from online consumers and unbiased shopping tests to provide objective rankings of the leading e-commerce sites.” Has the dot-com shakeout brought on a kind of e-commerce split personality disorder?

Don’t Even Think About It

When asked what advice he might offer to beginners interested in getting into e-commerce, Drugstore.com CEO Peter Neupert told the E-Commerce Times: “Unless you have very deep pockets, great stamina and a clear vision of what you are trying to do, I’d probably say don’t try. That isn’t to say that there isn’t lots of opportunity, but there are also lots of players going after that opportunity. You have to have more than a great idea — you need a great idea coupled with great management, and lots of money.”

That was in early February, and Drugstore.com was gearing up for its official launch. The venture was viewed with high optimism. Drugstore.com had already established important relationships with several Internet powerhouses, including Amazon and Yahoo! Neupert, one of Microsoft’s most influential former executives was at the helm. Plus, the idea was great — online shopping would take the chore out of going to the drugstore, Neupert said.

True, there are a lot of players in the Web pharmacy game — possibly hundreds of separate sites that sell prescription drugs. Nevertheless, few of them pose serious competition for Drugstore.com, and most are destined to fall victim to the dot-com shakeout without ever getting the dubious recognition of landing on a death watch list.

As consolidation progresses, just a handful of companies are likely to be serious contenders in the battle for the high ground. Despite its shabby financial appearance, Drugstore.com is still leading the charge in the health category. A chief competitor is online pharmacy Planet Rx (Nasdaq:PLRX). But with a current share price of about 5/8 — down from a high of 36 1/2 — another of the “likeliest to succeed” seems awfully close to issuing a death rattle.

Only the Good Die Young?

A little over a year ago, Planet Rx was a finalist for the “Rookie of the Year Award” bestowed by MIT’s Sloan School of Management. And earlier this summer, the company placed third in the health category of Forrester’s PowerRankings.

PlanetRx.com “offers consumers many ways to find products, real-time inventory information, and the ability to save multiple health profiles,” the research firm said.

However, Illinois-based employment firm Challenger, Gray & Christmas issued an ominous report in July, which found a correlation between the layoff of staff and dot-com closures. The report said that the bulk of the 7,592 Internet jobs lost since December were among Internet retailers. Health and fitness sites lost 671 jobs, the firm said.

The survey came just a few weeks after Planet Rx announced that it would lay off some 15 percent of its workforce.

Hints of Life

In general, the online health business is viewed as robust. According to a recent report from research firm Jupiter Communications, the health and beauty sector is growing at the “exponential rate” of 780 percent.

Research firm IDC said in June that U.S. sales of pharmaceutical, health, and beauty products over the Internet will boom from less than $250 million in 1999 to more than $18 billion in 2004. IDC predicted that 80 percent of the revenue — $14.8 billion — will come from online sales of prescription drugs.

“Powerful drug industry players, including managed care organizations and prescription benefit managers, are developing e-commerce strategies. As a result, the growth of this market will accelerate substantially over the next five years,” said Jim Williamson, senior research analyst with IDC.

Among the e-commerce strategies that bode well are such expensive undertakings as the agreement Planet Rx entered with a pharmacy benefits manager, which the company acknowledged would lead to lower revenue for the second quarter and the remainder of fiscal 2000.

A recent report by Forrester Research lends a vote of confidence to the direction online pharmacies are taking. Forrester predicted that an emphasis on infrastructure and high-level services will allow online pharmacies to emerge as e-commerce success stories within the next two years.

“Forrester believes that online pharmacies will rise to the challenge of selling prescription drugs online — ringing up $15 billion in sales in 2004,” analyst Elizabeth W. Boehm wrote in “The ePharmacy Opportunity.”

Somebody Gets It

It appears that both Drugstore.com and Planet Rx have sound business models, excellent management, exceptional customer service records, and strong leadership positions in a thriving sector of e-commerce. Both companies have made tough decisions to spend money on strategies that will ensure long term success. Yet both have dismal share prices and are struggling to stay alive.

Speaking of the obstacles to e-commerce success, Drugstore.com’s Neupert said, “The most basic challenge is communicating the values to consumers and getting them to change their behavior.” Neupert may have been wrong. A more formidable obstacle could be getting investors to change theirs.

There is a glimmer at the end of the shakeout tunnel, though. On July 26th, Alpha Venture Capital, Inc. signed a definitive agreement to provide up to $50 million in equity financing “with terms which we believe are favorable,” said Steve Valenzuela, Chief Financial Officer of PlanetRx.com. The company said it plans to use the money for “working capital and other general corporate needs.”

On August 2nd, Drugstore.com said it raised $62.68 million through the private placement of common shares. The company also reported a large jump in sales for the second quarter.

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